Business …”but some are more equal than others”

3 May

Lower MC and, technology brand differentiation Economics

These are some of the empirical evidence of behavior we see from firms: expand production, decrease costs. Maximize revenue, and decrease total costs of operating for that quarter. It’s efficiency, it’s profit, it’s also… unfair.

Why? Because none of the Economists have thought to model decreasing marginal costs yet.

Here’s how it works:
Transnational companies lower the cost of basic office processes in a number of ways. Back-office outsource tasks to India, vertically integrate with suppliers of parts they need, build factories in other countries to produce for bigger markets. All these things require some set-up work (note: really energy-intensive and also capital), but once they are in place factories offer huge benefits to the cost-per-unit. The same is true with factory farms.. This cost-per-unit is the one you can’t compete with. It’s decreasing marginal cost. The largest 500 multinationals control over 1/2 of world trade flow, and 1/5 of GDP (Feenstra, Taylor 229).

One of my best posts ever talks about how Agricultural trade doesn’t work for poor people. It was something I intuited after being in Costa Rica (all the big companies opening up are American), and then in Development Economics when talking about the benefits of NAFTA to LDCs. It’s odd, because the benefits aren’t so clear other than business. In fact, some people are really hurt (in Economics terms, the ones with the higher MC). Like Mexican campesinos… poor guys have nowhere to sell their corn. It’s corporate-level scale economies.

Anyways, here’s the accompanying Economic model we’ve been studying that proves it. Follow along..

MC/price formula
c(q)= F+ a(q)*q
— where a(q) is a decreasing function with (q).

Average cost = p/Q = F/Q + a(Q)
— strictly declining average costs.
— returns to scale

Marginal cost = A(q), declining with q in format 1 + 1/x
(externalities constant, but some businesses have more)

What would be the implications of a model like this?? (for factories, retail chains, or farms)
a. larger firms can produce cheaper, and more efficiently by trading.
b. most efficient would be one firm with high quantities — natural monopoly condition
–this is not a natural monopoly model, rather any firm that faces a downward sloping demand curve for their product.
c. management race to expand chain to different areas to maximize profit.
–I feel like this better explains what’s happening with today’s firms. It does give credit to Obama’s regulatory battle with big banks. If there is some value to diversity (there is..) then we had best to fight it. Unlike most, a model with this format does give an economic basis to regulate or tax firms that are harmful to competition.
–this is not a normal monopolistic competition model; even those developed by Krugman (2004) involve suggestions of a stationary “average price” and “average quantity”. This is more like a natural monopoly problem.
–It’s not unnatural, it’s created by human forces.

How else do larger corporations get their advantage over competition?

we see that corporate lobbying “pays off” in that they are effectively able to affect government to pass or vote down a bill. “it would be bad for business” is as good as killing a bill in this environment. Nothing in Economics says that firms should be able to write the rules they govern by.

But it’s a paradox in Washington: when you are looking for regulators and industry experts, where do you find those with most experience? And in policy? It’s those from the largest players of the industry. Many of the USDA regulators are former Monsanto execs. It’s easy to imagine those in charge of the department of commerce being big business representatives, and certainly within the EPA. Finally, the money in lobbying pays off when a representative is seated, and rewards those with up-front capital with tax returns and policy convenience. If this effect is at all skewed toward larger businesses over smaller ones, you can say it has a non-zero effect, and is significant on unit costs.

If developing countries are supposed to grow to be convergent by exports, why do they have to sell out to American companies as well?? If we’re supposed to get rich with capitalism, does it really just mean conglomeration?

See my other works on the Economy and Environment:
Part 1: Economic History link
Part 2: Oil Energy Recessions link
Part 3: Nature and Econ link

PS America has never had a growth Economy without war (Ir) or Explosive Resource Use (Econ) or a Bubble (housing, stock market, technology). Whatzat Eddie?


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